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ECON-UA 2 Textbook Notes

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Maharukh Bhiladwalla

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Microeconomics: Hall and Lieberman
What is Economics?
Economics is the study of choice under conditions of scarcity.
Scarcity and Individual Choice
Scarcity- a situation in which the amount of something available is insufficient
to satisfy the desire for it.
As individuals, we face scarcity of time and spending power. Given more of
either, we could each have more of the goods and services that we desire.
Because of the scarcities of time and spending power, each of us is forced to
make choices.
Economists study the choices that we make as individuals along with their
consequences. When some of the consequences are harmful, economists
study what-if anything-the government can or should do about them.
The Concept of Opportunity Cost
o The opportunity cost of any choice is what we must forgo when we
make that choice. It is the most accurate and complete concept of
o When the alternatives to a choice are mutually exclusive, only the next
best choice-the one that would actually be chosen-is used to
determine the opportunity cost of the choice.
o An Example: The Opportunity Cost of College
Explicit cost- the dollars sacrificed-and actually paid out-for a
choice. This is part of opportunity cost.
Implicit cost- the value of something sacrificed when no
direct payment is made.
The opportunity cost of a choice includes both explicit and
implicit costs.
o A Brief Digression: Is College the Right Choice?
Attending college appears to be one of the best financial
investments you can make.
o Time is Money
The explicit (direct money) cost of a choice may only be a
part-and sometimes a small part-of the opportunity cost of a
Scarcity and Social Choice

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Scarcity of resources is what is holding us back from accomplishing the
goals of society that would satisfy everyone. In society’s case, the
problem is a scarcity of resources.
Resources- the labor; capital, land (including natural resources),
and entrepreneurship that are used to produce goods and services.
The Four Resources
Labor: The time human beings spend producing goods and
Capital: A long-lasting tool that is used to produce other
Physical Capital- the part of the capital stock
consisting of physical goods, such as machinery,
equipment, and factories.
Human capital- The skills and training of the labor
If something is used up quickly in the production
process it is generally not considered capital.
Capital stock- The total amount of capital in a nation
that is productively useful at a particular point in time.
Land- The physical space on which production takes place, as
well as the natural resources that come with it.
Entrepreneurship- The ability and willingness to combine the
other resources into a productive enterprise.
Anything produced in the economy comes, ultimately, from
some combination of the four resources.
Resources v. Inputs
o An input is anything used to make a good or service. Inputs include
not only resources but many other things made from them
(cement, rolled steel, electricity), which are, in turn, used to
produce goods and services.
o Resources, by contrast, are the special inputs that fall into the four
categories. They are the ultimate source of everything that is
Opportunity Cost and Society’s Tradeoffs

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o Virtually all production carries an opportunity cost: To produce
more of one thing, society must shift resources away from
producing something else.
o For a society opportunity cost arises from the scarcity of resources
whereas for an individual it arises from the scarcity of time or
The World of Economies
Microeconomics and Macroeconomics
o Microeconomics: derived from the Greek word “mikros” meaning
small. It is the study of the behavior of individual households,
firms, and governments; the choices they make; and their
interaction in specific markets.
o Macroeconomics: derived from the Greek word “makros” meaning
large- takes an overall look at the economy. It focuses on the big
picture and ignores the fine details.
Positive and Normative Economics
o Positive economics deals with how the economy works plain and
o Normative economics is the practice of recommending policies to
solve economic problems. It goes beyond the facts and tells us
what we should do about them.
o Every normative analysis is based on an underlying positive
o A normative analysis is always based, at least in part, on the values
of the person conducting it.
o Why Economists Disagree about Policy
Policy differences among economists arise from (1) positive
disagreements (about what the outcome of different policies
will be), or (2) differences in values (how those outcomes
are evaluated).
Why Study Economics?
To Understand the World Better
To achieve social change
To help prepare for other careers
To become an economist
The Methods of Economics
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